Rep. Ed Royce (R-Calif.) fired the first salvo in a renewedwar on state regulation of insurance. Royce launched a broadsideagainst the National Association of Insurance Commissioners (NAIC),and said he will request a hearing to investigate the NAIC and itsrole in the insurance marketplace.

NAIC's role, he said, has gone far beyond what it has the legalauthority to do.

A top Republican on the House Financial Services Committee,Royce said the NAIC has acted beyond its self-described role as astandard-setting organization and taken on a regulatory role, bothin the U.S. and on the international stage. An NAIC spokespersonsaid the association has no immediate comment.

Royce, one of the most outspoken supporters of federal insuranceregulation in Congress, was a proponent of creating the FederalInsurance Office (FIO) and tasking it with studying the“benefits”—but not the disadvantages—of federal insuranceregulation. He also authored the ill-fated so-called “optional”federal charter for insurers and producers. Prominent among Royce'scampaign contributors have been those at the forefront of thedecades-long campaign to engineer a federal insurance takeover.

The timing of this may not be a coincidence. Very shortly,the much-delayed FIO study of insurance regulationcould be released. It may recommend some measure offederalization—unlike the recent Government Accountability Office (GAO) study,which praised our state-based insurance regulatory system forprotecting markets, the insurance industry and policyholders duringthe financial crisis. PIA was instrumental in bringing about theGAO report.

Holding a congressional hearing to attack the NAIC could simplybe part of a new campaign timed to coincide with the release of acritical FIO report and recommendation.

Related: Read “NAIC's2014 Budget Reflects Changing RegulatoryEnvironment“

What's really happening?

During the course of many years, periodic efforts to shift thesupervision and regulation of insurance away from the states towardthe federal government have occurred.

The insurance business is highly profitable. Well-run companiescan make a lot of money. Success breeds competition. The entireindustry is a tempting target for both inside and outsidecompetitors.

Our national system of state-based insurance regulationorganizes the insurance sector of our economy so that it is “walledoff” from the federal regulatory system that governs banks andsecurities firms. This is one reason that when the financialservices sector experienced the worst of its crisis in 2007-2008,insurance was insulated from the damage.

In the crisis—as in the Great Depression of the 1930s—insurancepolicyholders were protected by the states' prudent supervision andregulation. Policyholders also were protected by the insuranceindustry's inherent nature: While banks and securities firms seekrisk to make profits, insurance firms profit by insuringagainst risk. Banks and insurance companies are completelydifferent, as are their products.

Over the years, the supervision of banks and securities firms bythe federal government became increasingly lax. Regulations wereweakened or eliminated and supervision was reduced. At its worst,federal authorities embraced the concept of “self-regulation,”which in practice meant letting everybody do anything theywanted.

This did not happen with insurance. Insurance regulationremained with the states; it escaped the wholesale deregulationgranted to banks at the federal level under the Gramm-Leach-BlileyAct of 1999.

The result: when the 2008-09 financial crisis hit, rigoroussafeguards remained intact for the insurance industry. Prudentstate regulation worked, while lax regulation by the federalgovernment of banks and securities firms led to the crisis.

Here we go again

One would think that this would have settled the argument aboutstate versus federal regulation of insurance. But it hasn't. Justas some financial services firms are back to their old tricks ofover-leveraging and betting their depositors' money on riskyinvestments, the push to take over the insurance sector isback.

In the depths of the financial crisis in early 2008,then-Treasury Secretary Henry Paulsen issued his “Blueprint for a Modernized Financial RegulatoryStructure.” The section of that report dealing with insuranceenvisioned our industry being made part of a unified, globalfinancial services sector governed by one regulator, the same onethat governs banks.

Royce's remarks came just days after three former NAICcommissioners also criticized NAIC. One said the NAIC “…is at riskof becoming irrelevant and it's going to be fighting for its life.”Another said the NAIC is “fighting a losing battle to stayrelevant.” One also said that Europeans think the NAIC is“odd.”

Of course, the Main Event is the release of the FIO report andFIO's recommendations on how to “modernize” regulation of theinsurance industry. This report is almost 2 years overdue. Why thedelay?

Royce said he sees the release of the FIO report “as a watershedmoment for future regulation” of the insurance industry. Has heseen the report already?

Other signs

Another big push may be afoot to advance federal insuranceregulation. Every time this happens, “experts” proclaim theimpending death of the independent insurance agent. This hasstarted again.

What are billed as “studies” get issued with great fanfare.Often, these come from firms that would stand to profit handsomelyby doing business with mega-firms that would thrive in aconstricted insurance marketplace. But these are not reallyresearch studies at all, they are merely opinion articles. Nooriginal research to support their conclusions has been conducted.Often, they are a just rehash of the opinions of others.

Then there is the specter of other nations taking it uponthemselves to tell the U.S. that it doesn't know what it is doingand should be more like Europe.

Connecticut Insurance Commissioner Thomas B. Leonardi, chair ofthe NAIC's International Insurance Relations Committee,has dismissed a peer review of the U.S. insuranceregulatory system by the G-20's Financial Stability Board(FSB). In September 2013, FSB called on the U.S. to move toward afederal regulatory system for insurance.

“Should we throw out that system that works in regulating thelargest, most vibrant insurance system in the world, and adopt thebank model that failed miserably during the financial crisis?”Leonardi said. “I think that's ludicrous.”

Why is this so important to Main Streetagents?

Make no mistake: This debate is very important to Main Streetinsurance agents.

The “uniformity” that federal advocates tout could ultimatelyresult in far fewer insurance companies, offering fewer choices toconsumers, through fewer independent insurance agents. In addition,every state's insurance premium tax could be at risk of beingusurped by the federal government.

This battle has been fought many times before, and the statesystem of insurance regulation has always prevailed. It willprevail again.

Related: Read “ SERFFBoard Blues“